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Country at a Crossroads: For Migrants, New Land of Opportunity Is Mexico

September 21, 2013 by

Rising wages in China and higher transportation costs have made Mexican manufacturing highly competitive again, with some projections suggesting it is already cheaper than China for many industries serving the American market. Europe is sputtering, pushing workers away. And while Mexico’s economy is far from trouble free, its growth easily outpaced the giants of the hemisphere — the United States, Canada and Brazil — in 2011 and 2012, according to International Monetary Fund data, making the country more attractive to fortune seekers worldwide.

The new arrivals range in class from executives to laborers; Mexican officials said Friday that residency requests had grown by 10 percent since November, when a new law meant to streamline the process took effect. And they are coming from nearly everywhere.

Guillaume Pace saw his native France wilting economically, so with his new degree in finance, he moved to Mexico City.

Lee Hwan-hee made the same move from South Korea for an internship, while Spanish filmmakers, Japanese automotive executives and entrepreneurs from the United States and Latin America arrive practically daily — pursuing dreams, living well and frequently succeeding.

“There is this energy here, this feeling that anything can happen,” said Lesley Téllez, a Californian whose three-year-old business running culinary tours served hundreds of clients here last year. “It’s hard to find that in the U.S.”

The shift with Mexico’s northern neighbor is especially stark. Americans now make up more than three-quarters of Mexico’s roughly one million documented foreigners, up from around two-thirds in 2000, leading to a historic milestone: more Americans have been added to the population of Mexico over the past few years than Mexicans have been added to the population of the United States, according to government data in both nations.

Mexican migration to the United States has reached an equilibrium, with about as many Mexicans moving north from 2005 to 2010 as those returning south. The number of Americans legally living and working in Mexico grew to more than 70,000 in 2012 from 60,000 in 2009, a number that does not include many students and retirees, those on tourist visas or the roughly 350,000 American children who have arrived since 2005 with their Mexican parents.

“Mexico is changing; all the numbers point in that direction,” said Ernesto Rodríguez Chávez, the former director of migration policy at Mexico’s Interior Ministry. He added: “There’s been an opening to the world in every way — culturally, socially and economically.”

But the effect of that opening varies widely. Many economists, demographers and Mexican officials see the growing foreign presence as an indicator that global trends have been breaking Mexico’s way — or as President Enrique Peña Nieto often puts it, “the stars are aligning” — but there are plenty of obstacles threatening to scuttle Mexico’s moment.

Inequality remains a huge problem, and in many Mexican states education is still a mess and criminals rule. Many local companies that could be benefiting from Mexico’s rise also remain isolated from the export economy and its benefits, with credit hard to come by and little confidence that the country’s window of opportunity will stay open for long. Indeed, over the past year, as projections for growth have been trimmed by Mexico’s central bank, it has become increasingly clear to officials and experts that the country cannot expect its new competitiveness to single-handedly move it forward.

Article source: http://www.nytimes.com/2013/09/22/world/americas/for-migrants-new-land-of-opportunity-is-mexico.html?partner=rss&emc=rss

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High & Low Finance: Not Crying for Argentina but Fearful of a Ruling

August 29, 2013 by

After a second offer — on the same terms — in 2010, all but 7 percent of the bonds have been exchanged. But some of the remaining ones were owned by hedge funds that went to court. Last week they won a decision from the United States Court of Appeals for the Second Circuit in New York that has caused considerable concern at institutions like the Treasury Department and the International Monetary Fund.

The decision essentially says that Argentina cannot pay any creditors if it does not pay all of them, and says banks — in the United States and perhaps around the world — could face contempt charges if they allow Argentina to make payments to only those lenders it wishes to pay.

“While we strongly disagree with Argentina’s actions in the international financial arena,” a senior Treasury official, who spoke on the condition of anonymity, said this week, “we have serious concerns that the Second Circuit’s decision will undermine the orderliness and predictability of sovereign debt restructuring and could roll back years of progress.”

The United States government, in a brief filed with the appeals court before it made its decision, urged that it not take the course it ultimately took, warning that the decision could damage the status of New York as a chief world financial center and cause “a detrimental effect on the systemic role of the U.S. dollar” by encouraging countries to denominate their debt in other currencies and put them outside the jurisdiction of United States courts.

The International Monetary Fund, in a paper issued earlier this year, warned that the decision could “risk undermining the sovereign debt restructuring process.”

Such fears were brushed aside in the appeals court decision.

“We do not believe the outcome of this case threatens to steer bond issuers away from the New York marketplace,” said the opinion, written by Judge Barrington D. Parker. “On the contrary, our decision affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms. We believe that the interest — one widely shared in the financial community — in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts.”

Most international bonds are issued under either New York law or English law. The I.M.F., in its paper, states that under English law bondholders have no rights to file suits. Only the bond’s trustee can do that, and the trustee can be compelled to act only if a large number of bondholders demand it. It was concern that countries would flock to English law that led to the United States government warning that New York’s status as a world financial center could be damaged.

In the past, as the I.M.F. paper noted, it has been easy to get an American court to render a judgment against a country that defaulted on its bonds, but “it has been far more difficult to find assets that can be used to satisfy the judgment.”

That is because a federal law severely limits the assets that bondholders can seek to attach. Diplomatic missions are off limits, as are many other assets. And it is obvious that the courts of the nation that defaulted are not going to help the unfortunate creditors. So having the judgment has in the past proved to be worth very little.

But the appeals court has turned that around, at least in the case of Argentina. It concluded that Argentina is required by the “pari passu” clause that, in one form or another, is standard in bond contracts, to treat all its bondholders alike. So if it pays the interest payments owed on its restructured bonds, it must also pay the money owed on the bonds whose holders refused to restructure. And because those bonds are in default, that means the entire amount of principal and interest is owed and must be paid.

The United States brief says that interpretation of “pari passu” is simply wrong. “The settled understanding of pari passu clauses is that selective repayment does not violate the clause, even if it is the result of sovereign policy,” the brief stated. “This view has been expressed not only by the United States, but by academics, governmental bodies, and market participants.” It noted that similar clauses had not been impediments to debt restructurings in the 1980s and 1990s.

That, in and of itself, would have little effect. Argentina could simply ignore the ruling and continue to make payments on the restructured bonds while ignoring the other ones.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/08/30/business/fears-of-a-precedent-in-argentine-debt-ruling.html?partner=rss&emc=rss

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Greece on Track for More Aid, Official Says

August 26, 2013 by

BERLIN — The highest-ranking German in the European Central Bank said Monday that Greece could be eligible for additional aid and debt relief next year if it continued to fulfill promises made for the assistance it was already receiving.

The German, Jörg Asmussen, a member of the central bank’s policy-making executive board, said in an interview here that he was not signaling a new attitude toward Greece by its euro zone benefactors, but simply reiterating decisions made last year.

“There is no change of policy,” Mr. Asmussen said, noting that euro zone leaders already decided in November they would re-examine Greece’s needs early in 2014.

Still, his comments came as Greece has become an issue ahead of Germany’s national elections on Sept. 22. Mr. Asmussen’s former boss, Wolfgang Schäuble, the German finance minister, put Greece back on the public agenda when he said last week that more aid was certain, rather than merely very likely. Mr. Asmussen was a top aide to Mr. Schäuble before joining the E.C.B. in 2011.

Mr. Asmussen′s comments on Monday referred to a decision last November by the euro zone finance ministers, or the Eurogroup. They agreed that Greece would be eligible for a fresh look at its needs as soon as it was able to finance current government spending on its own, not counting interest payments, and had undertaken steps to improve its economic performance and fulfilled other promises to its international lenders: the E.C.B., the International Monetary Fund and the European Commission.

If “the debt is still considered to be too high, the Eurogroup will consider to take additional measures,” Mr. Asmussen said. “That is the point of time when we will look at the debt question again. This is already decided and made public in November last year.”

The I.M.F. has estimated that Greece will have a financing shortage around 10.9 billion euros, or $14.6 billion, for 2014 and 2015. Greek Finance Ministry officials have suggested that the shortage will be smaller than the I.M.F. estimate, which is subject to revision, but they have been exploring ways to plug the gap. In an interview over the weekend with the Greek newspaper Proto Thema, Greece’s finance minister, Yannis Stournaras, cited a figure of 10 billion euros as the likely shortage.

Mr. Asmussen, who met in Athens last week with Prime Minister Antonis Samaras, said there were signs of stabilization in the country, which has suffered from soaring unemployment and plummeting economic outlet.

Referring to recent economic data, Mr. Asmussen said, “For the first time in years there were no negative surprises.”

Alison Smale contributed reporting from Berlin and Niki Kitsantonis from Athens.

Article source: http://www.nytimes.com/2013/08/27/business/global/greece-on-track-for-more-aid-official-says.html?partner=rss&emc=rss

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Missteps in Big Asset Sales Plague Greece as Privatization Chief Resigns

August 19, 2013 by

One of the ways Greece plans to dig itself out of debt is through the sale of state-owned assets. But that effort has been besieged by missteps.

The latest involved Stelios Stavridis, the chairman of the government privatization agency, who had overseen one of the country’s first big asset sales — a one-third stake in the state gambling company, OPAP, for 652 million euros. But then he hitched a ride to a vacation spot on the private jet of a Greek oil magnate involved in the deal.

Government officials insisted that Mr. Stavridis’s ouster from the privatization agency, Taiped, was “for ethical reasons” and would not upset the country’s state sell-off effort. But the privatization program has suffered from political upheaval and delays and has fallen far short of the revenue targets set by Greece’s so-called troika of foreign creditors, the European Commission, the European Central Bank and the International Monetary Fund.

The Greek finance minister, Yannis Stournaras, on Sunday sought Mr. Stavridis’s resignation from Taiped after a newspaper quoted the chairman as saying he had traveled last week on the Lear jet of the oil and shipping oligarch Dimitris Melissanidis, a major stakeholder in the Greek-Czech consortium Emma Delta, which agreed to buy the OPAP stake in May.

The contract was signed Aug. 12 after much wrangling over the details. A few hours later, Mr. Stavridis, a 65-year-old Swiss-trained engineer, joined the oil magnate on his plane, which dropped Mr. Stavridis on Cephalonia, an island in the Ionian Sea where he spends his summer vacations. “Melissanidis, who was traveling to France, offered to take me with him to accommodate me,” Mr. Stavridis was quoted as telling the Proto Thema newspaper, which published a photograph of him, smiling, sitting next to a flight attendant.

Speaking to the Greek private television channel Skai after his firing on Monday, Mr. Stavridis defended his decision to fly on Mr. Melissanidis’s jet, noting that the trip had come long after the OPAP deal was completed. He referred to “hypocrisy” in Greek society which, he said, was interested in “the facade rather than the essence.”

“I am not a monk and I won’t hide,” said Mr. Stavridis, who founded Piscines Ideales, one of Europe’s largest manufacturers of swimming pools in 1991. More recently, he was head of the Athens water board, Eydap, which is also in the country’s privatizations portfolio.

Less than six months earlier, Mr. Stavridis’s predecessor, Takis Athanasopoulos, was accused of a breach of faith during a previous stint at the head of the state electricity board. Prosecutors accused him of commissioning a power station in central Greece even though he knew it could not operate profitably.

The main left-wing opposition party, Syriza, which has vowed to reverse all privatizations if it comes to power, said Taiped was “a tool of the troika” whose goal was “the biggest sell-off of state wealth that Europe has seen since the era of East Germany.” In a statement on Monday, Syriza described the Stavridis affair as “the first clear admission of the dirty relationship between the government of the memorandum and business interests,” referring to the Greek deals for foreign loans.

The troika has urged Athens to speed up state sell-offs and to step up tax collection to raise much-needed money. But revenue targets have been revised downward several times. The original target of 50 billion euros by 2016 was later changed to 19 billion euros, then to 15 billion euros. Since last year, the troika has focused on annual targets. But Taiped is expected to fall 1 billion euros short of its 2.5 billion euro target for 2013.

Article source: http://www.nytimes.com/2013/08/20/business/global/missteps-in-big-asset-sales-plague-greece-as-privatization-chief-resigns.html?partner=rss&emc=rss

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Contraction Shows Signs of Slowing for Greece

August 12, 2013 by

Gross domestic product shrank by 4.6 percent in the second quarter compared with the same three months a year earlier, the official Hellenic Statistical Authority said. That was an improvement from the first quarter of 2013, when the economy contracted 5.6 percent compared with a year earlier.

The economy has been shrinking since the third quarter of 2008, when the collapse of Lehman Brothers rocked the global financial system, drying up credit to Greek businesses and consumers, exposing years of errors in government record-keeping and driving the country to the brink of collapse.

The troika of international bodies that have been shoring up Greece’s finances and guiding its recovery — the International Monetary Fund, the European Central Bank and the European Commission — has approved more than 240 billion euros ($319 billion) in bailout loans since 2010, a sum larger than the country’s annual economic output. In July, Greece received a loan installment of 5.7 billion euros after Parliament agreed to further increases in taxes and cuts in the public payroll.

Ben May, an economist in London with Capital Economics, said the latest number was “encouraging, as it looks like the quarterly pace of decline is slowing.” An analysis of the second-quarter figure suggested that G.D.P. might have ticked up by about one-tenth of a percent from the first quarter, he said.

“The troika’s forecast for a 4.2 percent annual decline in 2013 looks achievable,” Mr. May said.

But it remains “plausible,” he said, that the Greek economy will continue shrinking into 2015. He forecast a 2 percent decline in G.D.P. for next year, followed by a 0.5 percent contraction in 2015.

Many economists argue that the austerity approach favored by the troika is itself part of the problem, pushing Greek unemployment to depression levels. The jobless rate reached a new peak of 27.6 percent in May, according to the statistical agency, with youth unemployment around 65 percent.

Austerity has in practice largely meant laying off civil servants and cutting social spending, because raising taxes generates little revenue in a collapsing economy. The policy is paying off in one respect: Christos Staikouras, the deputy finance minister, told reporters on Monday that the government had achieved a primary budget surplus of 2.6 billion euros, or 1.4 percent of G.D.P., in the first seven months of the year, significantly better than the expected primary deficit of 3.1 billion euros. A primary deficit or surplus excludes debt service and some other costs.

The International Monetary Fund said last month that Greece had made “important progress in rectifying precrisis imbalances” and that the economy was “rebalancing.” But the fund noted that the gains had come as a result of recession, which has suppressed imports, and not through “productivity-enhancing structural reform.”

Mr. May said that it was almost certain that some kind of government debt restructuring would be needed to achieve what the troika calls a sustainability target: a debt-to-G.D.P. ratio of 120 percent by 2020.

The Bundesbank, the German central bank, expects Greece to receive yet another bailout after German national elections on Sept. 22, according to a report Sunday in the newsmagazine Der Spiegel, which cited a central bank document.

According to the document, which Spiegel said had been prepared by the Bundesbank for the I.M.F. and the German Finance Ministry, the Bundesbank says that it was only “political pressures” that enabled Greece to obtain last month’s installment of financing, and that the bailout program remains “exceptionally” risky.

The German Finance Ministry dismissed the Spiegel report, saying it had no knowledge of the document Spiegel cited, Reuters said.

Article source: http://www.nytimes.com/2013/08/13/business/global/greek-economy-shrinks-for-20th-straight-quarter.html?partner=rss&emc=rss

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Economix Blog: High Profits Signal Danger for Big Banks

July 18, 2013 by Leave a Comment

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

In their latest earnings reports, the biggest banks in the United States are reporting eye-popping levels of profitability that surprise even Wall Street analysts. Goldman Sachs’s profit doubled in the second quarter of this year from the comparable quarter a year ago. JPMorgan Chase could make $25 billion for the whole year. Bank of America reported that net income rose 63 percent. Even Citigroup, so often the sick man of American megabanks, managed its best results since 2007, with $4.2 billion in net income in the quarter.

Today’s Economist

Perspectives from expert contributors.

These results create a major political problem for the big banks, a point that Tom Braithwaite has made in The Financial Times (subscription required). Executives at these companies have spent most of the last four years asserting that stronger regulation in the United States, including higher capital requirements, will result in lower profits, a reduced ability to lend and a slower economic recovery for the nation.

Yet higher capital requirements are already in place, with further steps in the works, including a tougher leverage ratio at the initiative of the Federal Deposit Insurance Corporation (so the country’s biggest banks would need to finance themselves with relatively more equity and relatively less debt). And regulation has tightened to some degree. There is also more political scrutiny – hence executive compensation is being held below the levels that were previously associated with this much profit.

In Europe, regulation remains weak, and the banks are floundering. In the United States, the rules are tightening, and the big banks are doing great. Once American politicians and regulators reflect further on exactly why the banks have become so profitable, this will only reinforce the latest push for more reform.

The banks have easy funding. The very largest banks can borrow cheaply – this is, in fact, a key part of the unconventional loose monetary policies being pursued by the Federal Reserve. To be fair, the Fed wants lower interest rates for everyone, but the biggest banks benefit the most.

As Senator Sherrod Brown, Democrat of Ohio, emphasized at a recent hearing, there is also an implicit government guarantee for these banks, a point now acknowledged by Treasury Secretary Jacob J. Lew.

Despite everything that has happened in the last half decade, the very largest banks, including JPMorgan Chase, Goldman Sachs and Citigroup, can engage in some very risky business.

This is a great deal – a government backstop for your cheap funding combined with the ability to take a lot of risk (e.g., metal warehouses, where JPMorgan Chase and Goldman Sachs are big investors, or emerging markets, where Citigroup has a great deal of exposure.)

These very large banks do not have much equity in their businesses; it is all about the leverage (meaning they fund their loans and other asset holdings mostly with debt). For example, at the end of the second quarter, JPMorgan Chase had shareholder equity of just over $200 billion and a total balance sheet of around $2.5 trillion (under the generally accepted accounting principles used in the United States ) or closer to $4 trillion (using international accounting standards, which treat derivatives exposure in a different way). So JPMorgan Chase had from 5 to 8 percent of its balance sheet, depending on which accounting measure you prefer, funded with equity and the rest with debt (read the long version of its earnings release to see this clearly).

JPMorgan Chase is a very highly leveraged business, and the same is true of other megabanks. When things go well, such highly leveraged companies make high returns – measured in terms of return on equity (unadjusted for risk). For example, trading securities can sometimes help increase profits; this was the experience of Citigroup in the latest quarter and before 2007 (and also for JPMorgan Chase and Goldman Sachs).

Charles Prince, the former chief executive of Citigroup, famously remarked, “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” This was in July 2007 when, really, the music had already stopped (the subject of a commentary from Yves Smith at nakedcapitalism.com at the time).

The banks are lifted now by the (partial) economic recovery. But what happens when the economy weakens in the United States or somewhere else in the world? What happens also when money is lost on securities trading or on loans to emerging markets or on complex derivatives that no one in management fully understands? More highly leveraged businesses go up faster and come down further.

At the same time, a deeper political shift is under way, with a big step toward bipartisan agreement that structural change is needed in our largest banks. Specifically, Senator John McCain has joined forces with Senators Elizabeth Warren, Maria Cantwell and Angus King to push for a 21st century Glass-Steagall Act.

Speaking with Yahoo Finance this week, Senator King, an independent from Maine, made a common-sense and compelling case that the United States needs to limit reckless gambling using insured deposits – and the only way to do this is with structural change, separating out boring banking from high-risk trading activities (see also this interview with Elizabeth Warren on CNBC).

Thomas Hoenig, vice chairman of the F.D.I.C., also explains clearly that breaking up the banks along functional lines would be helpful – we should aim to separate relatively risky “broker-dealer activities from the federal safety net.” (I have also contributed to this debate in recent days, including in a column for Bloomberg News, in my baselinescenario blog and an NPR interview.)

Whenever global megabanks report huge profits, think about the risks they are not reporting and who will bear the costs. The good news is that leading senators are starting to think along exactly these lines. Regulators will take note.

Article source: http://economix.blogs.nytimes.com/2013/07/18/high-profits-signal-danger-for-big-banks/?partner=rss&emc=rss

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Today’s Economist: A Call to Battle on Bank Leverage

July 11, 2013 by Leave a Comment

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Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Tuesday, federal banking regulators opened an important new phase of the debate on how safe very large financial institutions should become. The next round of argument will be intense; the focus has shifted to the specific and high-stakes question of how much leverage big banks can have – i.e., how much of each dollar on their balance sheet they should be allowed to fund with debt rather than with equity.

Today’s Economist

Perspectives from expert contributors.

The people who run global megabanks would rather fund them with relatively more debt and less equity. Equity absorbs losses, but these very large companies are seen as too big to fail – so they benefit from implicit government guarantees. A higher degree of leverage – meaning more debt and less equity – means more upside for the people who run banks, while the greater downside risks are someone else’s problem (the central bank, the taxpayer or, more broadly, you).

A key regulator on this issue is the Federal Deposit Insurance Corporation, which was created in 1933 to insure banking deposits – and hence serves as a crucial underpinning for public confidence in the financial system. The F.D.I.C. has a responsibility to financial institutions that pay insurance premiums; the goal is to avoid using federal tax dollars, so any losses are absorbed by the insurance fund.

Small banks have been pointing out for some time that while they pay a great deal in insurance premiums, the main dangers in the financial system arise from the excessive leverage and more generally mismanaged risk-taking of big banks. The Independent Community Bankers of America has an excellent set of materials on ending too big to fail, in which it asserts,

The U.S. will not have a robust and truly competitive market for financial services until the too-big-to-fail problem is definitively resolved.


I highly recommend the white paper put out by the association on this issue.

On the F.D.I.C. board, the strongest voices for limiting leverage by big banks have been the two Republican appointees, Thomas Hoenig and Jeremiah Norton. If either were in charge, my guess is that we would end up with a leverage ratio closer to 10 percent than 5 percent. (The way “leverage ratio” is defined in this debate is confusing – a higher ratio actually means more equity is required relative to debt, so a higher ratio implies less debt and a safer system, all other things being equal. As with all discussions of financial transactions, you need to check the fine print.)

Martin J. Gruenberg, the chairman of the F.D.I.C., has also been good on the leverage issue (I’m a member of the F.D.I.C.’s Systemic Resolution Advisory Committee, but I’m not involved in any of their work on bank capital or leverage). In its official announcement of the proposed rule-making, the F.D.I.C. said:

A strong capital base at the largest, most systemically significant U.S. banking organizations is particularly important because capital shortfalls at these institutions have the potential to result in significant adverse economic consequences and contribute to systemic distress both domestically and internationally. Higher capital standards for these institutions will place additional private capital at risk before the federal deposit insurance fund and the federal government’s resolution mechanisms would be called upon, and reduce the likelihood of economic disruptions caused by problems at these institutions.

The problem appears to be the board of governors of the Federal Reserve Board, which once again appears to have given in to industry pressure.

The big banks swear up and down that to subject them to a tougher leverage requirement (less debt, more equity for them) would somehow derail the economic recovery or even crater the global economy.

This is a complete fabrication – read the independent bankers’ report or look at the recent paper by Anat Admati and Martin Hellwig, “The Parade of the Bankers’ New Clothes Continues: 23 Flawed Claims Debunked,” which goes in detail through all the fallacious arguments that have surfaced in response to their recent book, “The Bankers’ New Clothes.”

Plenty of smaller banks are willing and able to lend to companies and individuals in the real (i.e., nonfinancial) economy. The bankers’ association, Mr. Hoenig, Mr. Norton and other current and former officials (such as Sheila Bair, the former head of the F.D.I.C.) want to end the subsidies received by too-big-to-fail banks. Create an even playing field by removing – or at least reducing – the advantages enjoyed by the very largest banks, which benefit not just from an implicit subsidy but can borrow on advantageous terms from the central bank and obtain other privileged forms of official support not available to anyone else.

The Fed’s board, unfortunately, has sided with the megabanks, resisting attempts by the F.D.I.C. to set an interim final rule on leverage (which would be more definite and harder to lobby than the proposal put on the table) and pushing back against the idea that the leverage ratio for megabanks should be at least 6 percent.

So what we have instead is a proposal, which will now receive comments, for the leverage ratio to be 5 percent for the largest eight or so financial companies (at the holding company level; debt levels would need to be slightly lower at insured bank subsidiaries). At the same time, this does present an opportunity. There is a split of opinion within officialdom, and the F.D.I.C. still wants to do the right thing – put a tougher cap on leverage. The comment period can cut both ways; representatives of the big banks will argue for 4 percent or even 3 percent (the minimum under the Basel III capital accord), but those more concerned with financial stability can still push for 10 percent or even higher (i.e., allowing less debt and insisting on more equity).

The F.D.I.C. has made some progress but now needs help. With encouragement from their constituents, Congressional representatives might be persuaded to push for tougher limits on the leverage at big banks.

Article source: http://economix.blogs.nytimes.com/2013/07/11/a-call-to-battle-on-bank-leverage/?partner=rss&emc=rss

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For Ireland, a Setback on the Road to Recovery

June 27, 2013 by Leave a Comment

As Ireland prepares to become the first European country to exit its international bailout, politicians across the Continent have promoted it as a model for how austerity can help a country emerge stronger from the crisis.

“A shining example,” Chancellor Angela Merkel of Germany declared recently.

But Ireland’s economy is disappointing its fans — again.

The country slid into its second recession in three years during the first quarter, the government reported on Thursday. Consumers and businesses, still reeling from steep tax increases, government spending cuts and a long stretch of sluggish economic activity, have sharply curbed spending.

“Everything is not hunky-dory in the Irish economy,” said Constantin Gurdgiev, a professor at Trinity College in Dublin. “But there is a group of people who refuse to listen to that, because they see it as convenient to promote Ireland as a success story to support policies promoted by the troika,” he said, referring to the country’s bailout creditors, the International Monetary Fund, the European Central Bank and the European Commission.

Gross domestic product shrank 0.6 percent in the first quarter from a year earlier and was revised to show contraction of 0.2 percent in the fourth quarter of 2012, the government said. Its economy had already shrunk 1 percent in the preceding quarter.

Consumer spending slumped 3 percent in the first quarter from a year earlier, the steepest decline in four years. And exports of goods and services declined 3.2 percent, the deepest contraction since Ireland fell into its crisis in 2009, the government reported.

The backsliding reverses the momentum Ireland seemed to have gained since it joined Greece in 2010 as an emergency bailout recipient. In exchange for its 67.5 billion euro ($88 billion) bailout, Dublin agreed to an austerity program aimed at rapidly improving the country’s tattered balance sheets.

But gross investment in the economy has continued to shrink, with construction activity and the retailing sector.

“Everything domestic is still contracting,” Mr. Gurdgiev noted.

On the other hand, austerity measures in Britain may be having an effect. The Office of National Statistics reported on Thursday that the British economy grew by 0.3 percent in the first quarter, a 1.2 percent annualized rate.

That was a revision up from the previous estimate. Contrary to earlier readings, the British economy did not slip into a double-dip recession the last quarter of 2011 and the first quarter of 2012, the office said.

On the Continent, France’s official accounting agency warned on Thursday that France would need a severe dose of austerity in the form of spending cuts, saying the country could no longer rely on tax increases to fix its finances.

The state’s Court of Auditors noted that public finances had been held in check for several years through higher taxes and spending control. But it said the policy had reached its limits.

If the country’s budget deficit is to reach 3 percent of gross domestic product — the European Union target — by 2015, structural spending cuts “on the order of” 13 billion euros ($17 billion) will be needed in 2014, along with 15 billion euros of cuts in 2015, the report said.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at BNP Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of gross domestic product last year, the auditors found, up from 55.9 percent in 2011 and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

Article source: http://www.nytimes.com/2013/06/28/business/global/for-ireland-a-setback-on-the-road-to-recovery.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Europe’s Finance Ministers Start Negotiating Guidelines on Failing Banks

June 20, 2013 by Leave a Comment

LUXEMBOURG — European Union finance ministers on Thursday began to negotiate rules for rescuing or closing failing banks, regulations considered crucial to promoting financial stability in the region.

But the two-day meeting could be overshadowed by renewed concerns in Greece, where the crisis began. On Thursday, the International Monetary Fund and euro zone officials issued a thinly veiled warning that it could suspend aid to Greece by the end of July if the political turbulence prevented monitors from completing their review of the country’s finances. Olli Rehn, the European commissioner for economic and monetary affairs, expressed frustration that Greece was again undermining efforts in Europe to turn the page on its five-year crisis.

“I love Greece but I’m very much looking forward to a Eurogroup news conference where Greece is not going to be discussed and a summer where we don’t have any Greek crisis,” Mr. Rehn said at a news conference.

The urgency for transformative measures has largely ebbed since the European Central Bank calmed the markets by promising to buy bonds from troubled euro zone countries. But the surge of concerns about Greece underscored the need for the European finance ministers to secure deals — however modest — during the marathon negotiating session in Luxembourg.

A so-called banking union could help prevent a recurrence of the chaos that ensued during a bailout for Cyprus in March, when governments and international lenders argued over how to impose losses on investors in the country’s troubled banks. Such policies could also prove vital if banks reveal new vulnerabilities during the next round of so-called stress tests, which will most likely happen next year.

The goal of the ministers’ talks was to develop policies that “finally close the vicious circle between the banking crises and sovereign crises” and to “definitively put behind us the financial crisis that has weighed on Europe since 2008,” said Pierre Moscovici, the French finance minister.

The meetings could also allow the leaders of the Union’s 27 member states to endorse reform efforts ahead of their meeting next week in Brussels, their last scheduled session before the summer. Still, the meetings are likely to result in incremental steps, rather than transformative ones like creating a lender of last resort to guarantee government or bank debt. The meeting of the 17 ministers from the euro zone, called the Eurogroup, focused on determining the conditions under which countries could draw on a shared bailout fund to inject money directly into troubled banks.

Even though European Union leaders agreed to push forward that initiative a year ago, the ministers confirmed on Thursday night that this tool will not be available until the European Central Bank takes over the supervision of some of the bloc’s largest banks in the second half of 2014. But ministers agreed that up to 60 billion euros, or about $80 billion, could be drawn from the fund to rescue banks whose failure could have broad impact on the financial system.

The ministers also left open the possibility of recapitalizing banks that are already in trouble. “The potential retroactive application of the instrument will be decided on a case-by-case basis,” Jeroen Dijsselbloem, the president of the Eurogroup, said at a news conference.

That option is important for Ireland, which invested more than 30 billion euros, or about $40 billion, to rescue its banks during the crisis. The country is lobbying to use the bailout fund, called the European Stability Mechanism, to recapitalize the banks and relieve its debt.

“We’ve always argued that Ireland was an exceptional case,” Michael Noonan, the Irish finance minister, said at the meeting earlier on Thursday. “We’re not arguing this case for all our colleagues in the euro zone.”

The ministers decided to oblige countries to contribute 20 percent of any capital increase as a way to encourage governments to prevent mismanagement or losses at banks, a demand made by countries like Germany. When the meetings continue Friday, the finance ministers from all countries in the European Union will try to hash out a plan for shutting down troubled banks.

A central issue is the rules for imposing losses on a bank’s creditors, rather than putting the burden on taxpayers. Some countries, including Britain, are pushing to ensure that governments retain some flexibility. The worry is that automatic losses for some creditors could set off fears of losses at other institutions, which could start bank runs.

But for some countries, like Spain, where government finances are under severe strain, having a single rule book has become an important competitive consideration. Spain wants to ensure that bank investors do not flee to more prosperous countries like Germany, where mechanisms for resolving bank problems might be better capitalized and could be used to shield creditors from losses.

Article source: http://www.nytimes.com/2013/06/21/business/global/europes-finance-ministers-start-negotiating-guidelines-on-failing-banks.html?partner=rss&emc=rss

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Lines Blur in U.S.-Europe Debate on Austerity

June 16, 2013 by Leave a Comment

The Europeans lately have slightly eased their austerity policies, after four years of deep spending cuts and rising taxes that many economists blame for keeping the Continent in recession long after America’s ended.

And the Obama administration, after years of pressing Europe to adopt American-style stimulus measures, is now presiding — if reluctantly — over European-style austerity that is measurably slowing its recovery.

Much of that austerity is in the form of across-the-board spending cuts known as sequestration that were forced by Republicans in Congress. But Mr. Obama supported an end this year to both a temporary payroll-tax cut, which the Congressional Budget Office and private analysts credited with spurring consumer spending and creating jobs, and the Bush-era income tax cuts for the wealthy. What stimulus remains in the American economy can be credited to the expansionary monetary policies of the independent Federal Reserve System.

That new reality in the United States reduces the president’s already limited leverage in his fiscal debate with Europeans, analysts on both sides of the Atlantic say, even as Europe’s woes continue to act as a drag on its trading partners, including the United States.

“President Obama will continue trying to lead by persuasion rather than by example,” said Eswar Shanker Prasad, an economics professor at Cornell University and a former official of the International Monetary Fund. “The U.S. is likely to push other countries towards adopting measures to support growth, including a slowdown in the drive for fiscal austerity, but against the backdrop of its own premature fiscal tightening.”

With the United States “just beginning to solidify its recovery, the last thing it needs right now is a major shock emanating from Europe,” Mr. Prasad added. “But the reality is that the U.S. can only jawbone. It cannot really influence policies in any substantive way.”

American and European officials said in interviews that arguments over austerity versus stimulus, so prominent at international gatherings in recent years, are likely to be muted at the two-day summit conference of the Group of 8 industrialized countries that is being held at the lakeside Lough Erne resort in Enniskillen, Northern Ireland. Besides Mr. Obama, participants include the leaders of Canada, Britain, France, Germany, Italy, Japan and Russia — countries that account for about half of the world’s economic activity.

The reduced emphasis on stimulus versus austerity occurs even as unemployment remains at double digits in much of Europe, stoking unrest especially among the young. In part it reflects the fact that this spring, in advance of the summit conference, Treasury Secretary Jacob J. Lew and his counterparts among European financial ministers hashed out their differences so the heads of state could focus elsewhere. Also, the Group of 8 agenda is set by the gathering’s host — for this meeting, the conservative and pro-austerity prime minister of Britain, David Cameron.

Yet even Mr. Cameron’s agenda, on international taxation, tax transparency and trade, is likely to be overshadowed by the allies’ intensifying debate over whether and how to intervene in Syria’s worsening civil war.

That likelihood was suggested late Friday by a summary from Mr. Cameron’s Downing Street office about his pre-summit videoconference with Mr. Obama, Chancellor Angela Merkel of Germany, President François Hollande of France and Prime Minister Enrico Letta of Italy. They discussed “how G-8 countries should all agree to work together on a political transition to end the conflict” in Syria, according to the statement from London. But significantly, the call did not include President Vladimir V. Putin of Russia, Syria’s most important ally and arms provider.

Administration officials say that Mr. Obama is likely to make his most fulsome economic arguments against Europe’s continued emphasis on budget cutting — and for the relatively successful American model — after the Group of 8 meeting, when he flies to Germany. On Wednesday he is to be in Berlin for a state visit with Ms. Merkel.

Andrew Higgins and Stephen Castle contributed reporting.

Article source: http://www.nytimes.com/2013/06/17/business/economy/for-g-8-meeting-talk-of-economy-but-syria-looms-large.html?partner=rss&emc=rss

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